On the shape of risk aversion and asset allocation

Pierre Six
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Pierre Six: Pôle Finance Responsable - Rouen Business School - Rouen Business School

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Abstract: This paper focuses on asset allocation. We show how any shapes of risk aversion can be modeled to incorporate the mixed evidence suggested by the empirical studies about this important subjective variable (e.g., Holt and Laury, 2002; Meyer and Meyer, 2005; Guiso and Paiella, 2008). Our setting builds on and can be compared to the well-known Constant Relative Risk Aversion (CRRA) framework. Our empirical results exhibit a mean-reverting pattern of optimal assets demands even for the case of the constant opportunity set (Merton, 1969). This feature stands against the mean-reverting pattern of assets demands usually linked to the mean-reversion behavior of stock prices (Poterba and Summers, 1988; Wachter, 2002). We demonstrate that this mean-reverting pattern is amplified by the volatility of the market and diminished by investment horizon.

Keywords: Risk Aversion; Asset Allocation; Mean-Reversion; Wealth; Options (search for similar items in EconPapers)
Date: 2011-11-02
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Published in CEFRA (Center for financial risk analysis) Seminar, Nov 2011, Lyon, France

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00753817

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